Final answer:
Cartels are inherently unstable as individual oligopoly members have incentives to cheat for higher profits. They can secure high profits by acting as a monopoly, but this is often undermined by illegal explicit collusion and the temptation for individual firms to increase output. Hard evidence of collusion is scarce, making enforcement a significant challenge.
Step-by-step explanation:
Cartels, which are a type of collusive oligopoly, tend to be unstable due to individual members' incentives to cheat for additional profits. In theory, cartels can achieve the highest profits by acting similarly to a monopolist; they restrict output and raise prices to maximize collective profits. However, this stability is undermined as each firm in the cartel may independently benefit from expanding output, leading to a breakdown in the agreement. Explicit collusion, including forming cartels, is often illegal, reinforcing this instability. Enforcement is challenging because hard evidence of collusion is difficult to obtain, especially in economies like the United States where formal cartel agreements are rare.
When comparing the outcomes between a stable cartel and a breakdown leading to cutthroat competition, a cartel would charge higher prices, supply less quantity, and earn more profit than firms would earn collectively in a fiercely competitive environment. Once competition intensifies, the industry quantity would increase, prices would decrease, and collective profits would diminish.